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Foreign Direct Investment versus Portfolio Investment : A Global Games Approach

  • Yamin Ahmad

    ()

    (Department of Economics, University of Wisconsin - Whitewater)

  • Pietro Cova

    ()

    (Department of Economics, Georgetown University)

  • Rodrigo Harrison

    ()

    (Instituto de Economía, Universidad Católica de Chile)

We present a model of investment under uncertainty about fundamentals, using a global games approach. Goldstein & Razin (2003) show that there is an information based trade-off between foreign direct investment (FDI) and portfolio investment (PI) which rationalizes some well known stylised facts in the literature - the relative volatility and reversibility of foreign direct investment versus portfolio investment. We extend their result and show that uncertainty about fundamentals does not imply a multiplicity of investment outcomes even when there is an information-based trade-off between direct investments and portfolio investments. In our paper, uncertainty about fundamentals actually helps narrow down the set of possible equilibria. Hence we find that the equilibrium outcome does not exhibit co-ordination failure.

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File URL: http://www.uww.edu/documents/colleges/cobe/economics/wpapers/05_03_ahmad.pdf
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Paper provided by UW-Whitewater, Department of Economics in its series Working Papers with number 05-03.

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Length: 26 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:uww:wpaper:05-03
Contact details of provider: Postal: Whitewater, WI 53190-1750
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Web page: http://www.uww.edu/cobe/economics/main.html

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  1. Assaf Razin, 2002. "FDI Contribution to Capital Flows and Investment in Capacity," NBER Working Papers 9204, National Bureau of Economic Research, Inc.
  2. Philip R. Lane & G.M. Milesi-Ferretti, 2003. "International Financial Integration," Trinity Economics Papers 20031, Trinity College Dublin, Department of Economics.
  3. Assaf Razin & Efraim Sadka & Tarek Coury, 2002. "Trade Openness, Investment Instability and Terms-of-Trade Volatility," NBER Working Papers 9332, National Bureau of Economic Research, Inc.
  4. Flavio Toxvaerd & Chryssi Giannitsarou, 2004. "Recursive global games," Money Macro and Finance (MMF) Research Group Conference 2003 104, Money Macro and Finance Research Group.
  5. Daron Acemoglu & Simon Johnson & James Robinson, 2005. "The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth," American Economic Review, American Economic Association, vol. 95(3), pages 546-579, June.
  6. Shang-Jin Wei & Gaston Gelos, 2002. "Transparency and International Investor Behavior," IMF Working Papers 02/174, International Monetary Fund.
  7. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January.
  8. Itay Goldstein & Assaf Razin, 2003. "An Information-Based Trade Off Between Foreign Direct Investment and Foreign Portfolio Investment: Volatility, Transparency, and Welfare," NBER Working Papers 9426, National Bureau of Economic Research, Inc.
  9. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  10. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2003. "World market integration through the lens of foreign direct investors," Policy Research Working Paper Series 3060, The World Bank.
  11. Mody, Ashoka & Razin, Assaf & Sadka, Efraim, 2002. "The Role of Information in Driving FDI: Theory and Evidence," CEPR Discussion Papers 3619, C.E.P.R. Discussion Papers.
  12. repec:rus:hseeco:72137 is not listed on IDEAS
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